International Business

How Ready Rates are Calculated on the Basis of Cross Rates for Currencies

Calculation of Ready Rates: Buying Rates. Let us call the currency (other than US dollar) for which the exchange rate is to be calculated as the ‘foreign currency’. Suppose a customer tenders a foreign currency bill for purchase by the bank. When the customer tenders a dollar bill, the bank disposes of the dollar acquired from the customer in the inter-bank market at the market buying rate and therefore the inter-bank buying rate for dollar forms the basis for quoting dollar buying rate to the customer.

In the case of a foreign currency being tendered by the customer, the bank should first get this foreign currency converted to US dollar in the international market. In other words, it has to buy dollars in the international market against foreign currency. The bank can do so at the market selling rate for dollar.

Therefore the customer rate for the foreign currency would be calculated by crossing the dollar selling rate against the foreign currency in the international market and dollar buying rate against rupee in the inter-bank market.

Selling Rates: When the bank sells foreign exchange (other than dollar) to the customer, it has to acquire the required foreign currency in the international market by selling equivalent US dollars. The bank can sell US dollars in the international market at the market buying rate for US dollars against the foreign currency concerned.

US dollars required to effect this sale has to be acquired in the inter-bank market at the market selling rate. Therefore, in calculating the merchant selling rate for foreign currency the relevant rates are dollar buying rate against the foreign currency concerned in the international market and dollar selling rate against rupee in the inter-bank market.

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